Deemed Modvat credit on iron and steel scrap upheld where the Department failed to prove goods were non-duty paid.

Deemed Modvat credit was treated as admissible on waste and scrap of iron and steel bought from the market because the Department failed to prove that the inputs were clearly recognisable as non-duty paid. The Tribunal read that expression to include goods on which duty was not paid, including wholly exempt goods and conditionally exempt goods where compliance with exemption conditions is not shown. It further held that, where credit is denied on that basis, the burden lies on the Department to establish the non-duty-paid character by evidence. On the facts, no such evidence was produced, so the disallowance and penalty could not be sustained.

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Issues: Whether deemed Modvat credit was admissible on waste and scrap of iron and steel purchased from the market when the Department alleged that the inputs were clearly recognisable as non-duty paid and no duty-paying documents were produced.

Analysis: The Tribunal applied the interpretation that inputs described as clearly recognisable as non-duty paid include goods on which duty has in fact not been paid, including goods wholly exempt from duty and goods covered by conditional exemption where the conditions are not shown to have been satisfied. It also relied on the principle that, where the Department seeks to deny deemed credit on the footing that the inputs were non-duty paid, the burden lies on the Department to establish that fact by evidence. In the present case, although waste and scrap of iron and steel were covered by exemption notifications, the Department led no evidence to show that the goods in question were clearly recognisable as non-duty paid.

Conclusion: Deemed Modvat credit was allowable and the disallowance and penalty could not be sustained.

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